Navigant Research Blog

Navigant Research’s report, Renewable Energy in the Mining Industry, summed up the state of the global mining business: “In the last decade, increased demand from countries such as China and other emerging economies pushed the price of many metals and minerals upward, which stimulated investment in the mining industry. More recently, the global economic downturn and the collapse in a number of metal and mined commodity prices forced the mining industry to scale back investment into new mine sites, reduce operating mine lives, and scale back their investment into more capital expenditure-heavy renewable energy.”

Since that report was published in the fourth quarter of last year, commodity prices have stumbled further, and the pressures on mining giants like Rio Tinto, BHP Billiton, and Vale Brazil have intensified.

On the surface, so to speak, it’s a great time to be an extractive company with worldwide operations in iron, copper, coal, and other minerals that are essential to the functioning of the modern industrialized economy. The rise of China and India has created a seemingly bottomless well of demand, particularly for iron ore for steelmaking; technological advancements have cut the costs of large-scale mining operations (while eliminating thousands of well-paying jobs); and governments in places desperate for economic growth, such as Mongolia and Sub-Saharan Africa, have proven pliant to the demands of multinational mining corporations.

A closer look, though, shows that big miners are playing a risky and ultimately unsustainable game. The term of fashion in the mining industry today is “de-diversification” as mining companies sell off low-margin mines that they invested in during the commodities boom of 2002-2008, before the global financial systems crashed and growth in China ground almost to a halt. To keep profits up, the companies are slashing costs and adding new production – a short-term strategy that could spell long-term disaster.

Rio Tinto’s results “showed that the strategy of carving into costs while ramping up volumes that are being pursued by the major miners has worked to offset commodity price declines,” wrote Stephen Bartholomeusz in the Australian business publication, Business Spectator. “The key question – worth billions of dollars – is whether it will continue to work.”

Twilight in the Mines

Ultimately, the dilemma facing miners of low-margin commodities like iron and coal is that as economies like China’s and India’s develop, they need less basic stuff. It takes less iron to make an iPhone than it does to assemble an airliner. Despite slowing demand, Vale plans to double its exports of iron ore to China over the next 5 years. Pumping more iron and coal into markets that need less of them is not a winning strategy over the long run. Goldman Sachs analysts have estimated that the rate of growth in the supply of iron ore is 3 times the rate of growth in demand. That’s a recipe for a glut and a price crash. Already, iron prices are on a downward slide.

Asian iron ore spot prices have fallen 31% this year, according to Reuters, and “the consensus is that they will remain below $100 for the foreseeable future as big miners such as BHP, Anglo-Australian rival Rio Tinto and Brazil’s Vale ramp up output even as Chinese demand growth weakens.”

As with coal, iron ore could be entering a downward spiral that could overwhelm the major miners as they narrow their focuses: “Iron ore risks becoming another coal,” remarked Reuters’ commodities columnist Clyde Russell, “where miners pursue output gains in order to lower costs, but in the end the resulting supply surplus just depresses prices even more, resulting in a no-win situation for producers.”

Like the coal era, the age of iron and steel is nearing its twilight. That’s not good if you’re a multinational mining outfit.

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At the Zwartkop Chrome Mine, near Thabazimbi, South Africa, mining company Cronimet Chrome SA has established a technological innovation – not below the ground, but above it. To help power the mine, Cronimet installed a hybrid solar-diesel system that includes 4,158 solar photovoltaic (PV) panels, producing 1.8 GWh of electricity – about 60% of the mine’s power. According to a report released by Carbon War Room in March, the Cronimet system will not only reduce fuel costs and carbon emissions for the mine, but also has the potential to “power local communities and improve the local economy.”

Like natural gas and wind power, solar PV and mining are becoming odd bedfellows – seemingly incongruent players in the energy landscape that are increasingly being paired to create win-win situations for each party. Solar PV is increasingly being utilized to reduce the costs and lower the environmental damage of extracting coal and other minerals. Chile, South Africa, and Australia are three of the leading countries where solar PV is being installed on mining operations, due to the remote location of the mining sites, unreliable (or nonexistent) electricity from the grid in the mining area, and the heavy use of diesel gensets in every aspect of mining operations. Navigant Research’s Renewable Energy in the Mining Industryreport forecasts that renewable technologies will supply between 5% and 8% of the world’s mining industry power consumption by 2022.

Winning Combination

The world’s largest solar PV company, U.S.-based First Solar, is now aggressively targeting diesel replacement solutions for African mines. The company acquired Solar Chile, a Chilean project development company with a pipeline of 1.5 GW of solar PV, in 2013. Much of this pipeline is in the Atacama Desert region, which boasts some of the highest solar irradiance in the world. Combining high solar irradiance and high cost of electricity is a recipe for solar company success. First Solar says its levelized cost of electricity is as low as 7 cents per kWh in such places – making it competitive with grid prices without subsidies.

In Australia, First Solar says it expects to develop as much as 200 MW of capacity for the mining industry over the next 3 years. First Solar’s Sydney-based vice president of business development for Asia Pacific, Jack Curtis, tells Bloomberg News that mines are not as profitable as they used to be, meaning cost control is a bigger concern, and solar PV can be a hedge against volatile fuel costs.

Similar to wind, the solar PV market of today has evolved into a sophisticated global industry and has distanced itself in some ways from the us versus them approach of renewables and fossil fuels. There can be synergies, albeit uncomfortable ones.